We Did It Before ...

Americans eagerly await another “morning in America” moment.

Irwin M. Stelzer

August 21, 2010 12:00 AM

If it were ever true that we Americans are provincial -- the charge made by European elites and pundits -- it no longer is. True, only about one-in-three American adults have passports, but then Europeans can drop in on neighboring countries by hopping on a train, whereas Americans face a longer, more expensive trip from a country large enough to accommodate a great deal of wanderlust.

If the current recession taught Americans, and especially those of our policymakers capable of absorbing new facts, anything, it taught that events in “ a far away country … [with] people of whom we know nothing,” to borrow from Neville Chamberlain’s description of Czechoslovakia, matter here at home. Guerrillas in Niger disrupt oil production and American drivers pay more for gasoline; Greece teeters on the brink of bankruptcy, and U.S. bankers nervously reexamine their exposure to sovereign debt and European holders of those IOUs; China manipulates its currency and the undervalued yuan sucks jobs across the Pacific; floods in Afghanistan and drought in Russia cut those countries’ cotton production and American farmers benefit from the consequent rise in prices.

In short, our two oceans are less relevant than they once were, in part because of the globalization of financial markets, in part because the cost of communication has plummeted with the rise of the Internet, in part because new techniques of warfare allow resident Islamic jihadists to reach targets old-fashioned enemy bombers could not. That’s part of the reason the G-20 has finally found a raison d’être beyond creating photo ops for politicians.

This new interdependence, or at least the policy-making and political aspect of it, was highlighted at a recent meeting in Washington between UK prime minister David Cameron and a group of pundits and policymakers. As Bill Kristol, editor of this magazine, put it in a recent issue of Britain’s Prospect magazine, when the presidential election rolls around at the end of 2011, Britain will have had over two years’ experience with “a government that came to power running against big government, [and] welfare-statism…. If Cameron is able to and chooses to pursue a bold reform agenda … it would be important and helpful to US conservatism and the US in general if he succeeds.” So the special relationship takes on a new aspect: American conservatives are looking to their UK counterparts as potential role models.

And not only in the re-scaling of government and re-defining the welfare state. American policymakers are divided over the question of how to handle our deficit, now in double digits as a percent of GDP. President Obama’s team and many mainstream economists believe it is too soon to cut spending lest the current slowdown become the dreaded double-dip; Republicans generally believe that until the deficit is brought under control by a cut in spending, the private sector will remain on the sidelines, husbanding its $2 trillion cash hoard. Democrats are willing to attack the deficit by raising taxes on “the rich” and perhaps instituting a VAT-style national sales tax; Republicans believe such measures will kill the fragile green shoots that are struggling to grow into a full-fledged recovery.

Meanwhile, the presidential deficit reduction commission, scheduled to report after the November congressional elections, is looking at, among other things, the Cameron-Osborne (the latter is Tory chancellor of the Exchequer) formula of a combination of £4 of spending cuts for every £1 of tax increases, and especially at the consequences of raising the marginal tax rate on high-earners -- as offensive an idea to many U.S. conservatives, with the notable exception of former Federal Reserve Board chairman Alan Greenspan, as it is to Tories unconvinced that their government’s plan to leave in place Labour’s increase of the top marginal rate to 50 percent will produce much cash for her majesty's treasury.

American policymakers are also looking to Germany for ideas about coping with unemployment. Germany’s system encourages reducing hours of work (kurzarbeit, or short work) rather than laying off workers, with government subsidies to help employers and retained workers, and the creation of an hours bank: hours owed to employers by part-time workers are drawn down without overtime compensation when business picks up. This has some attraction to administration economists struggling to bring the unemployment rate below double digits, perhaps to Germany’s current 7.4 percent level. Conservative critics argue that this system encourages workers to stay in jobs in declining industries, rather than move on, and has as an important feature the strict limitation of immigration to preserve German jobs for Germans, a policy unlikely to win wide support among liberals here. To which those taken with the German system respond by saying that part-time work, rather than unemployment, permits workers to retain skills that otherwise would atrophy. All grist for the think tank mills here in Washington.

Even tiny Denmark is included among the models tramping the policy runway. Almost half of the first page of the New York Times business section earlier this week was taken up with a discussion of the that country’s “Trimming [of] Its Admired Safety Net,” admired, it seems, “as a progressive touchstone to liberals in the United States.” Europe’s financial crisis has driven the unemployment rate from 1.7 percent to 4.2 percent, and with it the cost of unemployment benefits, set for all save high earners at 80 percent of wages. To offset this cost in a country in which the government already accounts for 50 percent of GDP, Denmark has cut the benefits period from four years to two, which is close to the length of time to which benefits here have been extended (from 26 to 99 weeks) -- American policy moving closer to the social democratic model. The Danes now think that longer benefits periods reduce the urgency of the hunt for a new job, a view shared by some American conservatives and, lately, policymakers in Spain and Portugal. Here, too, American policy wonks will be watching to see just how the new governments in Denmark and other European countries affect work-seeking incentives, unemployment, worker flexibility and the social stability.

Some of this hunt for policy ideas and guidance overseas is a healthy intellectual exercise, just as visits by foreign policy makers to U.S. think tanks and universities have enriched policies abroad. British thinkers have benefited from American experiments with welfare reform and with charter schools, while left-leaning American policy makers, including Dr. Donald Berwick, Obama’s choice to run the “reformed” health care system, claim to have benefited from their study of the NHS, which Berwick professes to “love.”

Unfortunately, the search for new models also reflects the most recent of our occasional losses of confidence in our economic system. Just as American confidence was shaken when the Soviet Union beat us into space, and later when the Japanese, then the new owners of Rockefeller Center, seemed about to overtake us as the world’s number one economy, so it has been shaken by the current recession, and aggravated by the rise of China. This week we learned that China had jumped over Japan as the economy second to America’s in size (but, crucially, not in per capita GDP), and is now also considered by the Pentagon to be a military threat. Worse, it has survived the current recession in good order, and is swamping American shops with its goods and “stealing jobs” from an administration as incapable of persuading it to abandon its currency manipulation as it is of persuading Iran to abandon its nuclear ambitions or Russia to keep its promise to withdraw from Georgia. Might it be that ministers are wiser than markets, that a touch of economic direction from the center is a better answer to the business cycle than the free markets, even as newly regulated and reformed?

When we were rattled by the Soviet’s conquest of space, President Kennedy restored our confidence by proving that we could regain the lead if only we chose to do the “hard” rather than the easy thing. And when Japan’s success contributed to American “malaise,” President Reagan proved that it could indeed be “morning in America” again. The Soviet Union has since been consigned to the dustbin of history, and Japan has suffered decades of economic stagnation. Meanwhile, we can continue learning from policy successes and errors by our foreign friends and, yes, enemies, while we wait for our next president to rally us to meet the economic, political and military challenges that now seem so overwhelming, as did those we overcame in the 60s and 80s.